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The pervasive lack of 'cynicism' is a troubling sign for the market

  • Investors should be confident and committed, but not arrogant and overly-confident.
  • Right now, the skeptics seem to have either given up or are in hiding.
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Growing up in the investment business, I learned cynicism from some great investors. I try to apply it every day, because trust and gullibility are two key ingredients for a short investment career.

We look carefully through what others call "trash" and search for flaws undetected in "darlings." I cringe at throwaway expressions that symbolize an accepted joyful condition, such as "synchronized global growth," in part because it's used as an absolute with no possible chance of stalling or derailing.

Market players tend to act in concert; that's what determines a hot trend, but positive momentum is usually accompanied by a healthy dose of skepticism, forcing the innovators and bulls to dig deeper and prove them wrong. Right now, the skeptics seem to have either given up or are in hiding.

As the S&P 500 doubled in three years from a low of 666 in March 2009 to over 1300 in March 2012, most investors were relieved that they hadn't lost all their money or their jobs managing money. By 2014 it had tripled from its 2009 low to 2000, at which point the background noise was decidedly pessimistic about interest rates, the economy, China, you name it.

Yet, in January 2018 with the S&P 500 at a dizzying 2850, I am noticing more bullishness than at any other time along this steep climb.

More troubling is a pervasive belittling of cynicism. This morning, I heard a highly accomplished market savant explain that the only downside to the current market is geopolitical risk. That was code for "there's really no problem at all" since we know, of course, that nuclear threats, terrorist events, Ebola outbreaks, and government shutdowns have been barely perceptible market disrupters.

"The more stocks rise, the more adrenaline rush market players like me get, similar to hearing Whitney Houston hit the high notes in "I Will Always Love You," watching the Patriots come from behind to beat Atlanta in the 2016 Super Bowl, and sinking a long putt."

Where, oh where, are the cynics who pounce back with clever retorts about how second half earnings need to exceed prior guidance or the party might be over? A good friend who recently retired from managing a large mutual fund told me that he's glad he no longer has to argue with people about how a market this hot can cool off quickly.

If someone even hints that the best may not be yet to come, they are drowned out by a resounding chorus of New-High cheerleaders. When I mention that a mounting level of structured products from investment banks that generate attractive fixed returns remind me of the rush to credit default swaps in the mid 2000's, people deride my attempt to ruin the party.

I learned my ultimate lesson in cynicism in 2000. A couple of years earlier, I was rewarded for my bullish affinity to internet and biotech stocks with the helm of a large diversified mutual fund. The prior manager, a brilliant investor with a stellar long term record, was alarmed at the valuation of these sectors. He had raised cash and increased the fund's weight in value stocks such as consumer staples.

I ended up with a mandate to be more aggressive. Less than two years later, the NASDAQ peaked, and eventually sank 83 percent. I was just praying that someone else's performance was worse than mine. Thankfully, I didn't lose my job.

But I can't forget that experience or the equally harrowing one in 2008. It doesn't make me afraid of the market, but it makes me afraid not to be skeptical of all the unchecked optimism.

The more stocks rise, the more adrenaline rush market players like me get, similar to hearing Whitney Houston hit the high notes in "I Will Always Love You," watching the Patriots come from behind to beat Atlanta in the 2016 Super Bowl, and sinking a long putt. Admit it - there's something magical about having more money than you started with despite not doing a ton to earn it. I remind myself all the time that magic has its limits.

Investors should be confident and committed, but not arrogant and overly-confident. So, doubt what the masses take for granted and push back if the answers are too easy. If you find a stock that is widely hated but the outcries are unreasonably negative, that's when cynics buy.

Don't sell the investments you think are still attractively priced, but stop replaying the soundtrack that says everything is so great we just need to lean back and enjoy the ride.

Commentary by Karen Firestone, chairman and CEO, Aureus Asset Management.

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